Differences between adjustable and fixed rate loans

With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call 1st Credential Mortgage Inc at (281) 778-0805 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in one period. Plus, the great majority of ARM programs have a "lifetime cap" — the interest rate can't ever exceed the cap amount.

ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for people who expect to move in three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky if property values go down and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.

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